Voltas -No respite, maintain ‘Reduce’ ::Prabhudas Lilladher

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􀂄 Margins nosedive: Voltas reported sales of Rs11bn, ahead of our estimate of
Rs10.2bn, on account of higher-than-expected sales in the MEP segment (up 8%
YoY to Rs7.6bn). However, sales for the EPS and UCP segment were 5% and
7.5%, respectively. Sales for the UCP segment were significantly impacted due to
unfavourable weather and general economic downturn caused by soaring
inflation and high interest rates. EBITDA margin was down 930bps YoY to 0.7%.
EBIT margin was severely impacted in both, MEP (down 750bps to 0.7%) and
UCP segment (down 940bps to 2.9%). Margins for the MEP segment were
impacted by cost overrun in two major Qatar projects due to squeezed timeline
on those projects. Margins for the UCP segment were impacted due to lower
volumes, higher ad spend and increased raw material prices. Adj. PAT was down
71% YoY to Rs228m.
􀂄 Increased competitive intensity changing margin profile: Voltas highlighted
that lack of orders in the international market has led to severe competitive
intensity, forcing it to lower its bidding margin to ~5% (from~8%) to improve its
chances of winning orders. It also highlighted that in the UCP segment, the
number of players has increased significantly and many of the newer players
have become aggressive which could lead to margin profile of the business
coming to sub 9% levels.
􀂄 Valuation and Outlook: The stock is trading at 15.5x FY12E earnings. We believe
that Voltas will continue to face headwinds in the MEP and UCP segment, both
on volume and margin front. This will continue to put pressure on working
capital and balance sheet, restricting valuation. We maintain our ’Reduce’ rating
on the stock.

DLF (DLF.BO) Q2FY12: A Slow Quarter Operationally  Citi Research

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DLF (DLF.BO)
Q2FY12: A Slow Quarter Operationally
 Revenue/PAT up 4% QoQ — Revenue came in at ~Rs 25.3b, up 7% YoY/4% QoQlarge
portion of ~Rs 6 b of FSI sales was recognized. Margins at 46% improved 100bps
QoQ- management expects steady ~45% margins going forward. PAT at ~Rs3.7b
declined 11% YoY (higher interest cost & taxes/lower other income), up 4% QoQ.
Headlines numbers were ahead of expectations led by higher Topline/better margins.
 Slow sales & launches in Q2, as expected — Sale of 1.3msf in Q2 (~0.6msf in
plotted, remaining in mid-income homes) vs 2.2msf in Q1. Launches largely absent in
Q2 due to delayed approvals– ~0.5msf added to execution schedule. Company has a
6.5-7.5msf launch pipeline in 2H - approvals in place for ~3.0msf expected in CY11.
 Net D/E remains high at 0.81x… — This is versus 0.79x in Q1 and was led by net
debt increase of Rs 10b- Rs 1.4b was due to non-cash forex impact on Aman Resorts'
offshore loans and remaining led by bunching up of some payments and divestment
cash flow delays. Company is targeting debt reduction of ~Rs 30b by FY12 end.
 …Clarity emerging on asset sales — While land FSI sale of ~3.0msf has already
come through and collection is under way, other transactions expected to close in Q3-
(1) Noida IT park sale definitive agreement signed, (2) Pune SEZ sale documentation
in process with approvals in place, (3) Aman resorts received 4 bids, evaluation is on.
 Other updates — (1) Net leasing was weak at 0.2msf led by a cancellation of 0.4msf
in Chennai property. In 1H, 0.9msf of net leasing (gross-1.6msf) has been concluded-
FY12 guidance remains unchanged. (2) Delivered 2.2msf in 1H; company is looking to
hand over >12msf in FY12. (3) Cost of debt is ~12.3% (vs. 11.8% in end of Q1).
 Tweak Estimates, New TP of Rs 271 — Based on 1H performance and management
commentary, we have modified our assumptions relating to cost of capital, reduced
land bank and increased net debt. 2H is typically more robust and should see volumes
improving, along with visible initiatives on deleveraging. DLF remains relatively better
positioned within large-cap/liquid property stocks.

Metal Sector – 2QFY12 Result Review:: Nirmal Bang

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A Quarter Marred By Downgrades
The 2QFY12 results had more negative surprises than positive ones. Out of a total
of 11 companies (which represent 87% of total metal segment’s market
capitalisation) in the total metal universe, only three companies – NMDC, JSPL and
JSW Steel - were able to beat consensus earnings estimates at EBITDA level.
Besides this, only one company - NMDC - witnessed an upgrade in FY12/13 EBITDA.
Companies, which have seen major earnings downgrade include the likes of Sesa
Goa, NALCO and Sterlite Industries. We would also like to highlight that EBITDA
margin for the quarter was the lowest compared to the past six quarters. We expect
the dismal performance to continue, as the decline in metal prices is yet to reflect in
financials. We retain our negative view on the sector and Sell rating on all stocks in
our coverage universe i.e. Tata Steel, JSW Steel, SAIL, Sesa Goa and NMDC.
Raw material, power and fuel costs spoil the show: Our sample companies attained
19% YoY revenue growth for the quarter, but increase in raw material and power/fuel costs
was much steeper at 28% and 30%, respectively, YoY. This led to 201bps YoY decline in
margin and thereby EBITDA growth was confined to just 6% YoY. On sequential basis, the
situation was more grim and EBITDA margin contracted 465bps, which resulted in a 23%
drop in EBITDA. Raw material and power/fuel costs increased 9% and 13%, respectively,
QoQ, despite a 0.4% drop in revenue.
Higher interest costs, depreciation and forex loss mars PAT performance: Total
interest costs for our sample companies rose 52% YoY and 18% QoQ, while depreciation
increased 21% YoY and 4% QoQ. Besides this, the sharp rupee depreciation resulted in
MTM loss on foreign liabilities, while other income fell substantially sequentially because of
extraordinary gains of Tata Steel during 1QFY12. This resulted in 11% YoY and 41% QoQ
drop in PAT for the quarter.
A quarter marred by downgrades: The quarter’s performance, which was impacted by
global slowdown, saw a sizeable cut in FY12/13E earnings. Sesa Goa witnessed the
maximum downgrade followed by NALCO, Sterlite Industries, Hindustan Zinc and Steel
Authority of India. We would like to mention that the earnings cut was also driven by a drop
in global commodity prices. NMDC is the only company which witnessed 1% and 0.5%
upgrade in EBITDA for FY12 and FY13, respectively.
Further downgrade likely: We believe this may not be the last quarter in terms of
downgrade and prospects of a further downgrade are likely. Consensus metal price
assumption for FY12 and FY13 appears to be higher than current prices as market
participants expect recovery in the coming quarters. However, we are not as sanguine as
the street and expect a prolonged slowdown in developed countries, which will also slow
down the growth in India.

Coal India: Air of uncertainty ::Kotak Sec

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Coal India (COAL)
Metals & Mining
Air of uncertainty. Media reports on Government’s proposal to meet its disinvestment
targets through cross-holdings among PSUs is yet another addition to Coal India’s (CIL)
list of uncertainties ranging from mining tax to ongoing wage negotiations. We,
however, base our investment thesis on a sustained earnings growth (16% CAGR)
driven by modest volume and price increase coupled with benefits of gradual reduction
in employee headcount. Maintain our ADD rating with a revised PT of Rs380 (from
Rs420) to factor the risk of unknowns.

Cairn India: Good crude and Rupee hedge:: Kotak Sec

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Cairn India (CAIR)
Energy
Good crude and Rupee hedge. We expect Cairn’s E&P portfolio to be boosted by the
potential commerciality of recent gas discoveries in Sri Lanka. Near-term stock
performance will likely be driven by (1) crude oil prices, (2) exchange rate movement
and (3) ramp-up of production from Rajasthan block. We maintain our REDUCE rating
on the stock with a revised target price of `315/share (`300 previously). However, we
see potential upside risks to our fair value of Cairn India from (1) potential gas resource
in Sri Lanka and (2) higher recovery of crude oil from the key Rajasthan block.

Buy TV18 BROADCAST ; TARGET PRICE: RS.65 :: Kotak Sec

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TV18 BROADCAST
PRICE: RS.35 RECOMMENDATION: BUY
TARGET PRICE: RS.65 FY13E P/E: 36.4X
q TV18 Broadcast (TV18) has declined 18% since 2QFY11 results, and 61%
YTD, underperforming our media coverage universe by 38%. We believe
key reasons for the same are: 1/ Unsteady cues in key channels Colors
(Hindi GEC) and CNBC - TV 18 (business news), 2/ top management departures,
3/ debt-heavy balance sheet of the company, 4/ weak results,
partly on account of loss-making movie operations of the company.
q While the concerns are justified, the stock has been beaten down to 1.4x
EV/ Sales FY12E, deviating significantly from valuations of ZEEL (3.1x EV/
Sales), and reducing the gap from news broadcasters' valuations. This,
we believe, is unjustified: 1/ Over 75% of TV18 Broadcast revenues is
brought in from more attractive, potentially high subscription streams
which include business news and entertainment, 2/ the competitive position
of the company's key channels, while unsteady in the recent past,
does not merit a downgrade of long-term revenue/ earnings view to
non-subscription earning genres (example: news).
q The presence of TV18 Broadcast in some of the most attractive spaces in
the broadcasting space (business news, Hindi GEC), coupled with relatively
low subscription revenues generated by the company, as well as
significant carriage and placement fees paid out to MSOs expose TV18 favorably
to the recent ordinance mandating digitization in India.
q While debt levels at the company's and parent's balance sheet are a matter
of concern (TV18’s FY12 EBITDA shall likely be fully consumed by interest
payments), we think the company shall be able to access capital -
either via stake sale in Viacom 18, or via closure/ rationalization of other
operations. Network18 is in discussions to make a stake sale in its ecommerce
ventures (Homeshop 18), which may reduce debt burden significantly.
q We believe the discount to fair value (Rs 65/ share, FY13E) reflects a high
degree of pessimism, and is likely to be challenged significantly if: 1/ the
management shows sufficient resolve and urgency in tackling issues
that TV18 faces, 2/ the digitization mandate gathers greater credibility in
investors' minds. Reiterate BUY, with a price target of Rs 65 (unchanged).
q Key risks to our investment view include: 1/ competitive risks, 2/ inability
of the management to make timely decisions on loss-making businesses,
3/ lack of earnings visibility.
Sharp correction provides opportunity
TV18 Broadcast has declined 18% since our last update, we believe, on the back of
weakening competitive position of company's key channels (CNBC-TV18, Colors),
and resignation of the company's CEO, announced soon after the results. YTD, the
stock has declined 61% - the largest decline in our media coverage universe, which
has declined (ex-TV18) 23%, in line with the broader markets.

ACCUMULATE BGR ENERGY SYSTEMS; TARGET PRICE: RS.353 :: Kotak Sec

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BGR ENERGY SYSTEMS
PRICE: RS.281 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.353 FY13E P/E: 8.0X
q Revenue declined during Q2FY12 by 32% YoY and was lower than our
estimates. Execution during the quarter was impacted by monsoons as
well as delays from clients regarding certain approvals
q Operating margins witnessed an improvement and stood at 14.2% due
to higher proportion of BOP project execution.
q Net profit performance was impacted by steep increase in interest outgo
and poor execution.
q BGR is currently trading at 7.7x and 8.0x P/E and 4.9x and 5.2xEV/EBITDA
on FY12 and FY13 estimates respectively. We roll forward our valuations
on FY13 at 10x FY13 estimated earnings and arrive at a revised price target
of Rs 353 (Rs 520 earlier).
q We downgrade the stock to ACCUMULATE from BUY earlier despite decent
upside from the current levels due to lower than expected numbers
seen during H1FY12, lack of visibility in terms of near term order inflows
from RRUVNL and NTPC as well as other private players. We had expected
improvement in the order inflows for company from Aug-Sep,
2011. Apart from NTPC turbine award, inflows for the company continue
to remain lackluster. This has resulted in lowering the revenue visibility
for FY13 and onwards. Corresponding increase in borrowings have
dented the overall profitability. Thus we believe that stock may continue
to underperform till the time order inflow ramps up significantly for the
sector.

Madras Cements: Buy :: Business Line

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With higher realisations pointing to better earnings, investors can buy the stock of Madras Cements, a leading cement manufacturer in the South. Over the next two quarters, even if demand is flat, higher realisation and a low base effect should aid bottom-line growth for the company. Currently, cement price is at Rs 305/bag in southern India, higher by Rs 40-45 over last year.

This provides cushion to margins against the increased fuel and power cost. Cement price in the southern markets should hold steady at present levels, given the players' proven pricing power in the market.

In the recent September quarter, Madras Cements reported 28 per cent sales growth and net profit more than tripled despite despatches not growing from the same quarter last year.

The company has been diverting despatches intended for Andhra Pradesh (prices are lower in the State compared with the region's average) to Tamil Nadu and Karnataka markets and gaining on higher realisations in these markets.

At the current price of Rs 105, the stock discounts its trailing one-year earningsby 7.8 times, slightly lower than that of its close competitor, India Cements.

PROFIT DRIVEN BY REALISATION

Though cement demand has improved in the northern markets of the country, it is still muted in the south. The revival in Andhra Pradesh — the largest cement consuming state of the region — has not been significant. However, the sluggish demand scenario in the South is offset by firm price realisations for cement makers. . From Rs 220/bag in August last year, cement price has risen to Rs 300-305/bag now.

A close to 35 per cent increase in realisation has helped players of the region, including Madras Cements, post strong sales and PAT growth. For the six months ending September 2011, Madras Cements reported a sales growth of 18 per cent and net profit doubled. Higher realisation has not only compensated for drop in sales volumes but also offset the higher input costs.

Madras Cements imports nearly 55 per cent of its coal requirement and in the last one year, coal price in dollar terms has gone up 31 per cent (to $123/tonne in September). However, , the company's operating margins have improved.

In the September quarter, the operating margin (before interest, depreciation and tax) was 33.75 per cent, higher than 18.29 per cent reported in the September 2010 quarter and 32.74 per cent reported in the June 2011 quarter.

The savings in costs seem to be a result of the company's 100 per cent captive power capacity with commissioning of 40 MW thermal power plant in Ariyalur recently (total thermal power capacity currently is 150 MW). The company is also building a new thermal plant of capacity of 25 MW in its facility at R.R. Nagar.

Thermal coal prices are down from highs to $119/tonne now. But the rupee's sharp depreciation against the dollar over the last couple of months could offset benefits on this front. That said, if cement prices remain stable at current levels, there may not be much impact on operating margins.

Given that demand in the southern markets is likely to go up, cement prices may not correct.

Also, the low base of cement price in the last year will help the company post strong numbers in the coming quarters — in the December 2010 quarter, cement price was around Rs 265/bag while in the March-2011 quarter it was around Rs 260/ bag.

EQUIPPED TO FACE HIGHER DEMAND

Madras Cements' manufacturing capacity is 12 million tonnes per annum. The capacity utilisation is 70 per cent, which is higher compared to the regions' average of 60 per cent. With extended rains in the south, though demand is lacklustre at present, it is likely to improve from January.

Cement demand may see some boost from the metro rail project in Tamil Nadu and housing projects in Karnataka and Kerala. When demand picks up, Madras Cements will be in a good position to cater, with the company having added new grinding units and powered completely by captive power plants.

Thanks to increased capex activities over the last year, the company's outstanding loans have increased by 8 per cent during the period to Rs 2,886.5 crore now. However, its debt-to-equity stands at a still reasonable 1.5 and interest cover is also comfortable at five times. The risk to our recommendation is a sharp decrease in demand from current levels and correction in cement price to below Rs 250/bag levels.

Housing Development & Infrastructure HDIL IN:: BUY : Nomura Research

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Profit & Loss:
1. Revenues of INR4.5 bn missed our estimate of INR4.7 bn, up 11% y-y and down 17% q-q. The company now gives out its consolidated results as the revenue recognition shifts to some subsidiaries.
2. INR2.43 bn of the revenues were recognized from the sale of floor space index (FSI) or development rights done in Goregaon, Mumbai in 3QFY11. INR770 mn was recognized after 0.4mn sqft of the HDIL Industrial Park was completed and handed over to the owners. INR700 mn was recognized on transfer of development rights (TDR) sales down 59% q-q, as only 0.28mn sqft was sold at INR2,500/sqft. We were expecting INR3 bn of FSI sales to be recognized and INR1.7 bn of TDR sales and were not expecting recognition of revenues on ongoing projects till 4QFY12. HDIL follows the project completion method of accounting.
3. The part recognition of revenues from the Virar Industrial Park was a pleasant surprise and strengthens our view that diversification away from dependence on TDRs for revenues will reduce significantly from FY12F onwards.
4. EBITDA margins turned out 200bps higher than estimated though 400bps lower q-q on lower TDR sales. EBITDA margins on the FSI sales are in the range of 40%-45% vs. ~60%-65% for TDR sales, as per management.
5. Depreciation on the consolidated balance sheet is much higher than the standalone owing to amortization of goodwill created on account of acquisition of subsidiaries. The company expects to amortize this goodwill in five years as a conservative accounting practice.
6. Total interest cost was also higher at INR1.5 bn vs. an estimate of INR1.2 bn while the tax rate was 26% higher than the estimate of 23% owing to lower TDR sales.
7. This contributed to PAT missing our estimate by 15% and the consensus estimate by 23%.
8. The company expects to recognize the INR2.2 bn of sales from the Virar Industrial Park by 4QFY12 as it hands over  the project to buyers post receipt of occupancy certificate.
9. It also has to recognize INR7.5 bn of FSI sales though the time-line remains uncertain on it.
10. The target is to complete three more projects Metropolis Residences, Premier Residences and Galaxy Apartments in 4QFY12-1QFY13. We believe that completion of all three projects could spill over to 2QFY13 and beyond postponing revenue recognition on the same.
11. The company has only 1.25mn sqft of TDRs remaining to be sold from phase 1 of the airport rehab project.
Balance sheet and cash flows:
1. The company had sold INR9 bn of FSI in Goregaon in FY11 to four developers; it has signed the final agreement with one and recognized revenues on the same. They have received only ~INR2.8 bn on the FSI sales to date as the buyers are still looking to raise funds. On the Popular Car Bazaar, Andheri FSI sale also done in FY11 for INR6.5 bn the company has received only INR3 bn to date. The amount of cash received in 2QFY12 was insignificant given the tight liquidity situation for property developers in India which is affecting the ability of the FSI buyers to raise funds.
2. In our view, the receipt of cash on these FSI sales was crucial to debt reduction for the company and with the increasing likelihood of not being able to collect all the remaining INR9.7 bn on the two FSI deals in FY12F could result in the company missing its debt reduction target of INR8 bn in the year and could also result in a need for refinancing of its upcoming debt repayments.
3. Its net debt has gone down INR1 bn q-q or 3% of outstanding debt. It has to repay INR12.2 bn in the next 12 months and unless the company manages to collect cash from the existing FSI sales or sell a significant amount of new FSI or land going forward, it would have to refinance its upcoming debt repayments. It free cash flow post interest payment was INR870 mn in 2QFY12 and INR1.35 bn in 1HFY12, which is not enough to make a dent in the gross debt of INR41.6 bn.
4. Its cash inflow from residential sales in 2QFY12 was just INR1.5 bn, which is just 3% of sales value achieved of INR47 bn when it should ideally be at least 7%. Improvement here would definitely help its cash flows and debt situation.
5. It has a total of INR16 bn of customer advances on its consolidated balance sheet.
Operational performance:
1. The company sold 0.5mn sqft of residential space in 2QFY12 worth INR950 mn, which is half of the INR1.9 bn of sales done in 1QFY12 driven by the slowdown in the Mumbai property market and also owing to lack of new launches as result of abrupt policy reversals.
2. Construction is on track as per management and the company has spent INR1.8 bn on construction residential projects and another INR400 mn on the rehab project for the airport. We believe that construction progress on two projects, Exotica – Kurla and Majestic Towers – Nahur, Mumbai, has been visibly slow over last several quarters. This has been led by the slowdown in construction on the rehab project for the airport, to which these for sale residential projects are linked, due to lack of clarity in the shifting of the slum-dwellers from around the airport to the rehab site.
3. HDIL expects to launch three residential projects in Ghatkopar, Premier Residences – Phase 2, Kurla and Meadows – Phase 2, Goregaon, all in Mumbai, in the next few months as it has received almost all approvals on them
4. The sale of FSI in Vasai-Virar is in the last stage of negotiation and an announcement could happen soon, again in the next few months. These two announcements could be positive for the stock.
5. On the airport slum redevelopment project the company is still waiting for the government to firm up the eligibility norms and currently no further shifting of families has happened post the shifting of 150 families in June 2011.
We recognise the lack of imminent catalysts for the stock, but believe that a resolution on the airport slum redevelopment project could be forthcoming post the civic body elections in Mumbai in Feb’12. The stock is currently trading at 0.4x FY12 P/B and a 60% discount to NAV, which we think is attractive and we maintain our Buy rating.

Redeem units without hassle:: Business Line

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Investors making redemption requests accompanied with an add-on service, either clarification sought from a minor turned major, or from the holder of a live SIP account need to ensure that they complete specific formalities to ensure their request is processed smoothly. Given below are such queries on redemption received from investors:

I requested for redemption along with a request for a change in bank details. It has taken more than three days to receive the amount.

Most mutual funds now follow a different process for processing of a redemption which is received along with a request for change in bank details. This is in the interest of investor and to prevent incidences of fraud.

Some mutual funds process the request for change in bank details but send the redemption proceeds after a gap of say seven/ten days instead of the usual three days. In the meanwhile, a transaction confirmation email or SMS is sent to investors which will alert them about a transaction in the folio.

Some other mutual funds will not process the request to change bank details along with the redemption and send the proceeds to the original bank account or with the original bank details printed in the cheque.

In an earlier article in this series, we have mentioned that mutual funds now allow individual investors to register up to five bank accounts in their folios.

This allows investors to add accounts in their folios and later be able to choose the bank account into which the redemption proceeds can be credited. This will prevent delays in the receipt of redemption amounts.

I am now 18 years old and gave a redemption request, attested by my Bank Manager. However, it was not processed.

Please note that any investment in the name of a minor will be locked once he/she attains the age of majority. Transactions are not permitted in such folios. In fact mutual funds do send advance intimation to investors informing them to register their new status.

Such investors should get the change in status to “Major” registered, after which they can freely transact in the folio on their own.

Fund / Registrar websites provide the required form detailing the documents required to effect this change.

I want to receive all future redemptions as a credit into my account directly. What do I do?

Please inform the Fund/Registrar through a written, signed request. In your letter, please mention the IFSC code of your Bank and attach a cancelled cheque leaf reflecting the code.

The same will be registered in your records and mode of payout changed.

I have requested a mutual fund by letter to “redeem complete amount and make balance zero”. The fund has not closed the account and continues to debit the amount of SIP and I am still holding units in spite of asking for a complete redemption.

You seem to be having a running SIP in a scheme. Please note that redemption of all units and ceasing of SIP are two different processes.

If you ask for redemption of all units in a scheme, all the units available on the particular date of the redemption request will be redeemed.

The SIP will however continue even if you have mentioned “redeem all units” in your letter.

To stop the SIP, you would have to give a separate written request duly signed asking the fund to stop the particular SIP. It would take about four weeks for auto-debits to stop.

Shree Renuka Sugars Ltd. Downgrading on delayed turnaround of Brazil sugar mill 􀂄BofA Merrill Lynch,

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Shree Renuka Sugars Ltd.
Downgrading on delayed
turnaround of Brazil sugar mill
􀂄 Downgrading to Underperform on disappointing Sep Q
Following significant earning miss in Sep11 quarter owing to cane shortage in
Brazil on account of adverse weather We have cut PO to Rs38 from Ps88 and
rating from Buy to Underperform, driven by cut in EPS for FY12e to a loss of
Rs4.3/sh from a profit of Rs9.5/sh and cut in EPS for FY13e to Rs3.2/sh from
Rs11.6/sh. Subdued sugar price along with higher cost of cane and excess debt
will hurt earnings and stock performance. Please note that Renuka Sugar recently
changed its accounting year to March from September.
Brazil cane shortage impacted Sep 2011 quarter
In the quarter ending Sep11 Renuka Sugar had a loss of Rs6.15bn compared to
our expectation of a loss of Rs105mn owing to shortage of cane in Brazil and FX
loss of Rs5.7bn. EBITDA at Rs2.44bn came in 60% below estimate and EBITDA
margin at 10.5% was significantly below our estimate of 25%. Adverse weather in
Sao Paulo reduced production of RDB by 25% leading to reduced utilization and
hence lower EBITDA margin of 17% while VDI of Parana had 46% margin.
Sugar price to remain subdued and hurt earnings
We expect global raw sugar price to remain at around current level of UScent25
per pound as production surplus of sugar globally will rise by 6mt next one year
compared. Subdued sugar price along with rise in cost of cane in Brazil as well as
India is likely to put margin pressure and hurt earnings.
De-rating could be restrained by deregulation and asset sell
We think valuation in terms of P/B will de-rate to 1.2x, which is its trough valuation
from 1.7x now owing to weak earnings. De-regulation of sugar in India and
proposed sell off of power plants in Brazil could add Rs13bn and limit the derating.
However current net debt to equity of 4x may still remain above 2.5x. We
also change our income rating from same/higher (7) to same lower (8) as we
believe the dividend is not secure over the next year.

Associated Cement Companies (ACC) Strong near-term, but highly vulnerable 􀂄 BofA Merrill Lynch,

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Associated Cement Companies
Strong near-term, but highly
vulnerable
􀂄 Strong YoY volume growth helped 3Q CY11 results
ACC’s 3Q CY11 EBITDA grew 44% YoY backed by strong volume growth. The
Co’s 18% volume growth in 3Q CY11 compares with ~6% growth for the industry,
and mostly reflects ACC’s market share gains in south India. EBITDA margin in
3Q CY11 was up ~100bps YoY adjusting for non-recurring employee payout
during the quarter. Margin performance was below consensus and our
expectations due to higher than expected energy and overhead costs.
Cement prices up again in October; pain seems postponed
Our feedback from dealers indicates that current cement prices are up ~10% vs
4Q CY10 and up 6% MoM for ACC. We see the industry's rational pricing
behaviour as a short-term postponement of pain given steep overcapacity
& downside risk to demand expectations. Price sustainability appears most
challenging in south India given JPA’s large expansion.
CY12E profit cut; coal cost may rise; volume growth to ease
Post 3Q results, we have cut CY12 EBITDA forecast by ~9% while CY11 EBITDA
stays largely unchanged (+2%). ACC sources nearly 40% of its coal requirement
from e-auctions. Continued ring-fencing of e-auction coal for the power sector is
likely to exert upward pressure on energy costs for ACC. On the volume front,
ACC’s strong outperformance vs the industry should ease in CY12E as the Co’s
large capacity expansions are already factored into recent market share gains.
Maintain underperform as risk-reward seems unfavorable
ACC is trading at an EV/capacity of ~US$134/ton i.e. ~10% premium to
replacement cost. Upside potential appears capped at ~US$150/ton assuming
rational pricing sustains while downside could be steeper at ~US$95/ton if
demand recovery fails to materialize or rational industry behavior falls apart.

Bhushan Steel : 2QFY2012 Result Update: Angel Broking,

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Strong top-line growth: During 2QFY2012, Bhushan Steel’s (Bhushan) net sales
grew by 43.4% yoy to `2,465cr mainly on account of higher volumes of flat
products. Flat products sales volumes grew by 41.7% yoy to 466,748 tonnes and
long product sales volumes grew by 3.8% yoy to 86,639 tonnes in 2QFY2012.
Long product average realization increased by 19.9% yoy to `45,164/tonne and
flat product average realization increased by 3.7% yoy to `46,987/tonne.
Depreciation and interest costs dent net profit growth: During 2QFY2012, the
company’s EBITDA increased by 47.4% yoy to `721cr, representing EBITDA
margin of 29.2% (up 78bp yoy). EBITDA/tonne stood at US$280 in 2QFY2012
compared to US$248 in 2QFY2011 and US$300 in 1QFY2012. Depreciation
expense increased by 185.0% yoy to `151cr on account of higher capacity.
Interest expense increased by 200.3% yoy to `302cr due to higher debt.
Consequently, net profit decreased by 20.1% yoy to `207cr. The company
reported exceptional item related to forex loss of `100cr during the quarter.
Excluding this exceptional item, adjusted net profit grew by 18.5% yoy to `307cr.
Outlook and valuation: At the CMP, the stock is trading at 9.9x FY2012E and
8.6x FY2013E EV/EBITDA, a significant premium over its peers. Although we
expect sales volume growth of 24.8% over FY2011–15E, we believe it is too early
to play the volume growth story of Bhushan as strong volume growth is expected
only post FY2013. Further, although Bhushan uses a combination of BF-EAF
technology to produce steel, rising prices of iron ore and coal will affect its
margins. Moreover, Bhushan’s debt-equity ratio remains high. We value the stock
at 8.4x FY2013 EV/EBITDA, deriving a target price of `293. Hence,
we recommend a Reduce rating on the stock.

Buy Apollo Tyres : 2QFY2012 Result Update: Angel Broking,

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Apollo Tyres (APTY) reported a mixed set of results for 2QFY2012. The company’s
standalone operating performance was subdued due to adverse product mix,
sluggish demand and continued raw-material cost pressures, while its European
operations posted strong performance led by robust demand for winter tyres
ahead of the peak season. We broadly retain our revenue and earnings estimates
for the company. We continue to maintain our Buy rating on the stock.
Consolidated sales up 47.3% yoy, net profit jumps 46% yoy: Consolidated net
sales posted 47.3% yoy (1.7% qoq) growth to `2,871cr, driven by a 31.9% yoy
(down 4% qoq) jump in volumes and 11.7% yoy (6% qoq) growth in net average
realization. Europe and South Africa operations registered strong revenue growth
of 42.8% and 14.8% yoy, respectively, during the quarter. The company’s
operating margin contracted by 148bp yoy (49bp qoq) to 8%, largely due to
weak operating performance on the standalone front. However, net profit grew by
46% yoy (flat qoq) to `78cr on account of a significant increase in other income.
Weak performance at the standalone level: While standalone net sales grew
strongly by 56.9% yoy to `1,845cr, driven by 37% yoy volume growth on a low
base of 2QFY2011 (lockout at Cochin plant), the company posted a 5.9% qoq
decline in due to ~10% qoq dip in volumes led by weak replacement demand.
OPM for the quarter declined considerably by 356bp yoy (122bp qoq) to 6.8%
due to unfavorable product mix (OEM – 34% of sales in 2QFY2012 vs. 31% in
1QFY2012 and 25% in 2QFY2011) and continued pressures on the raw-material
front – raw-material/sales ratio at 77.8% vs. 67.1% in 2QFY2011). Thus, net
profit declined sharply by 40.9% yoy (50.3% qoq) to `22cr. Lower tax rate
arrested the further decline in net profit during 2QFY2012.
Outlook and valuation: We remain positive on the tyre industry in view of the
structural shift that the industry is going through. We expect the company to
deliver a strong revenue CAGR of 22.5% over FY2011–13E, as production
ramp-up at the Chennai facility continues as per schedule. We expect the
company’s operating margin to improve in FY2013 on gradual softening of
raw-material prices. At `61, APTY is trading at attractive levels of 6.6x FY2013
earnings. We continue to maintain our Buy recommendation on the stock with a
target price of `74, valuing it at 8.0x FY2013E earnings

Oberoi Realty: BUY Target 360:: Anand Rathi

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Closing 220 BUY Target 360
Investment Rationale
~ Various Projects – Completed – Ongoing – in momentum
~ New launches – The trigger
~ Improving financial performance
~ The venture - 50% stake in ICICI venture
~ Developers try to woo buyers – Industry scenario
~ FDI policy nod – to spur real estate demand
The Business
Oberoi Realty Ltd is a Mumbai based real estate development
company. The company's primary focus is to develop residential
properties. They develop residential, office space, retail,
hospitality and social infrastructure projects in mixed-use and
single-segment developments. On going and planned projects are
of nearly 20 mn sqft. It’s now a mixed play in realty and hospitality.
Currently the company has 3 completed investment property i.e.
Oberoi Mall, Commerze (a commercial property) and Westin
Mumbai Garden City, a 269 room hospitality property.
The gross lease area of Oberoi mall was 552893 sft and that of
Commerz was 364888 sft.
The residential projects are Oberoi woods, Exquisite, Esquire,
splenfor, splendor Grande.
The social infrastructure project of Oberoi International school.

DISINVESTMENTS Overhang on PSU stocks to persist :: Edelweiss

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The government’s fiscal math is in a worrying state and it is likely that the
deficit target (4.6% FY12 GDP) could get overshot. The government has
also fallen behind on its disinvestment target and in order to kickstart the
process, media reports suggest that it has drawn up a new disinvestment
roadmap to raise INR460bn in the near term. We do not have full details
of the plan yet, but as per media reports, it essentially involves three
steps—monetisation of SUUTI holdings, strategic cross purchases by one
PSU into another, and buybacks by PSUs. In our view, steps such as
strategic cross holding could be a potential overhang given unrelated
diversion of cash and holding company discount on such investments. We
await more details from the Dept. of Disinvestment, but believe that
some of the steps, if implemented, could be directionally negative for the
PSU space. Stocks most likely to be impacted include Coal India, ONGC,
NTPC, SAIL, OIL and BHEL.
Government’s fiscal math in a muddle
Union Budget 2011 has set central government’s FY12 fiscal deficit target at ~4.6% of
GDP. In all likelihood, this target is likely to be overshot given the revenue shortfall and
higher‐than‐anticipated subsidy burden because of high crude prices. Problems are also
accentuated by the fact that given the volatile markets, the government’s budgeted
disinvestment target of INR400bn now looks a tall order. It has managed to generate a
mere INR25bn from disinvestments so far in the current fiscal. Thus, in an overall bid to
not stray too far from the budgeted target, it is trying to use various levers to shore up
finances. Accordingly, in an attempt to jump start its disinvestment strategy, the
government has published a white paper, essentially listing out three options for raising
capital.
Mulling three step formula to raise capital
Media reports suggest that the white paper on disinvestment lays down three methods of
disinvestment, mentioned below:
• Monetisation of Specified Undertaking of Unit Trust of India (SUUTI) holdings in
companies—expected to raise about INR230bn.
• Strategic cross holding purchases by one PSU into another—expected to raise about
INR135bn. Among a list of such proposed cross holding purchases include Coal India
acquiring a 5% stake in SAIL.
• Buyback by PSUs—expected to raise INR178bn. Names of companies currently doing
the rounds are ONGC, NTPC, SAIL, BHEL, Coal India, Oil India, Neyvelli Lignite, NALCO,
SJVNL and SCI.
This apart, the white paper also mentions a more longer term approach which entails
setting up a holding structure on the lines of a real estate company to monetize surplus
land.